Detox Aggregation: Buddy Up With Beijing

The ancient admonition seems the only way to hedge the reflection that as bad as Citi’s problems are, how much worse might they have been had Walter Wriston still been running the bank. It was the late Citibank CEO who, when he took over from George Moore in 1967, contrived to implant the go-go gene in the venerable institution’s DNA. Of course, it could have been worse. Wriston liked to boast that two presidents had offered him the Treasury secretaryship. Just imagine …

It was Walter (“Countries don’t go broke”) Wriston who pushed ahead in petrodollar lending, which effectively minted/printed billions of offshore dollars without the by-your-leave of the Fed. These dollars eventually found their way home (it is a tenet of faith with me that currencies are like Atlantic salmon; they always make their way back to the tributary in which they were spawned) and hello, Paul Volcker! In 1986, I even wrote a thriller, The Ropespinner Conspiracy (available online for $0.01 plus postage) that posited a Soviet “economic mole” introduced into the U.S. financial system to destroy it by doing exactly what Wriston and Citi were up to.

Now Citi is playing out the inescapable endgame of the Wriston-Weill (an amateur Wriston) legacy. It’s like a rigged baccarat game with the taxpayer holding the bank. How it will play out, knows God. One thing I am convinced of. Having watched Vikram Pandit on Charlie Rose (and you can, too, either on Charlie’s Web site or on YouTube), I have no doubt he’s unequal to the task—to put it about as kindly as I can.

And now BofA has done a degree-of-difficulty 9.8 full gainer into the soup, which had to be inevitable in a multibillion dollar deal (acquisition of Merrill Lynch) cobbled over a weekend under the gun. While it’s kind of fun to watch the Blowhard of Charlotte (I am no fan of Ken Lewis) squirm, this hits all of us so, schadenfreude will just have to wait its turn.

What to do, what to do, what to do?

One thing that strikes me about the way the present mess/crisis is being dealt with is how little imagination has been deployed. I never expected much from Henry Paulson, who comes across in Charlie Ellis’ extensive history of Goldman Sachs as mainly a smile-and-a-handshake guy and a ruthless office politician.

Now it’s reported that Mr. Paulson and F.D.I.C. suprema Sheila Bair are looking into some kind of “aggregator bank” to buy toxic assets off bank balance sheets. I have a kind of wild idea that might make this notion interesting.

One of the problems with the “global” crisis is that it isn’t being addressed globally. Washington, London, Brussels, Moscow, Tokyo, Riyadh, Beijing, Canberra: Each is doing its own thing. Nothing’s in sync. I think it would do wonders if some semblance of unity and cooperation could be implemented.

So, start with a few realistic givens: China has upward of a trillion dollars of U.S. Treasuries. In today’s markets, a holding on this scale could not be liquidated to any significant degree without horrific losses or a U.S. default—which would be the end of the world.

Yields on treasuries have drastically shrunk. Returns are virtually negligible.

The best thing that could happen to China’s domestic economy would be the recovery of the U.S. economy. By now, the latter has been so “consumerized” that only by restoring the confidence and creditworthiness of the consumer, and all who sail in him/her—mainly lenders—can a recovery be accomplished.

So here’s my idea:

Beijing and Washington would organize a joint U.S.-China “covered” fund that would start life underpinned by a trust fund into which China would put, say, $500 billion of its U.S. Treasuries in return for an equal face amount of trust certificates carrying a better interest rate than the underlying treasuries.

This fund would make/purchase loans in the U.S. by exchanging its own debt securities (backed by the treasuries contributed by Beijing) with holders of toxic CDOs, etc., on some rational value basis. Bang for the buck would be doubled: The money-good trust certificates exchanged for “toxic” assets would count as balance-sheet capital, while doubtful assets would be removed from balance sheets. Pricing would, of course, be crucial—but then it always has been, right from the outset of the present crisis. As a way of making sure that this new capital goes where it belongs—to the retail level of credit—participating institutions would agree to increase their loan books by, say, 10 percent per annum.

Profits would be split 60-40 between the U.S. taxpayer and China, which would also receive interest. If necessary, an equity feature might be incorporated. And, incidentally, the way to deal with the question of “bank nationalization” is for Uncle Sam to agree that, when and if the time comes, equity stakes received in consequence of bailouts will be offered via rights to the then-stockholders of the affected institutions and their successors.

Most important, the recovery effort would be globalized, what with Beijing and Washington each putting a shoulder to the wheel. This, more than anything, is what the world needs to see.